A Game of Number: Analysis suggests companies might be miscoding to avoid tariffs

Dian ZhangGateHouse Media

Thursday

Sep 5, 2019 at 6:00 AM

When President Donald Trump made good last summer on his promise to slap steep tariffs on a host of Chinese imports, some Chinese companies struggled to remain profitable.

When President Donald Trump made good last summer on his promise to slap steep tariffs on a host of Chinese imports, some Chinese companies struggled to remain profitable.

Others got creative.

A GateHouse Media data analysis of Chinese imports to the United States shows an uptick in the potential misclassification of product codes to avoid the higher tariffs. In particular, the analysis reveals nearly a dozen Chinese imports — including woven fabrics, furniture mounts and lamps — where such misclassification could be likely.

The findings correspond with information provided during interviews with at least 20 traders, brokers, economics researchers, former and current government officials that offer a rare peek into how easy it is for some companies to avoid Trump’s new duties.

“It's not a government-sponsored effort by the Chinese authorities to get around Trump’s tariffs,” said Gary Hufbauer, a senior fellow at Peterson Institute for International Economics, or PIIE.

“It’s done by individual suppliers and individual firms because, for the tariff at this level,” Hufbauer said, “that's more than any profit margin that any normal firm makes on a shipment.”

According to Hufbauer, as well as GateHouse’s analysis, the possibility of misclassification is probably increasing amid the escalating trade war.

To date, the United States has imposed additional tariffs on some $250 billion worth of Chinese products. China responded with tariffs of its own, affecting some $110 billion of U.S. goods and locking the two giants into what China’s Ministry of Commerce called “the biggest trade war in economic history.”

And it could get worse. Trump this month announced plans for a yet more tariffs aimed at an additional $300 billion worth of Chinese imports beginning on Sept. 1.

Unique codes

Just like everyone has a unique Social Security number, every type of product shipped to the United States bears its own 10-digit classification code, known as the Harmonized Tariff Schedule code, or simply HTS.

The more similar the product types, the more similar the codes.

When a new tariff appears, it affects a single HTS category. So even closely related goods can have different tariffs. A switch from a 10 to 20 at the end of a code could reduce costs without raising suspicion.

For its analysis, GateHouse examined several pairs of similarly coded Chinese imports where one was subject to increased tariffs and the other was not. The data, obtained by the U.S. Census Bureau, showed that imports of the affected products decreased after the trade war while those of the unaffected products increased.

“That's a good approach,” Hufbauer said of GateHouse Media’s data analysis. “It just shows you how similar these products are and how hard it is to distinguish between one and the other.”

Take certain types of light bulbs, known as “lamps,” for example. Trump last year imposed a 10 percent tariff on discharge lamps — such as those using fluorescent and mercury — but not on LED lamps. Both share similar HTS codes.

The year before the tariff took effect, China exported $254 million in discharge lamps to the United States and about $1.5 billion in LEDs. The next year, with the tariff in full effect, Chinese discharge lamp imports dropped to $189 million and LEDs jumped to $1.7 billion.

Some of the volume change also might be due to the rising popularity of LED lights, which are more efficient.

Most cases of such misclassification are probably unintentional, said Mike Watson, vice president and general manager of e-conolight at Cree Lighting. But, he said, as tariffs climb, “some companies can be introduced to the dark side and creep into intentional misclassification.”

It’s hard to prove a direct relationship between the increased tariffs and the potential for increased misclassification. But several sources confirmed it is happening.

Guoxing Zhan, a freight broker in Shenzhen, China, said one of his clients called late last year seeking help after U.S. customs officials seized her cargo at the border.

“They miscoded,” Zhan said. “They told me they unintentionally changed the numbers, but it’s so obvious that they didn’t want to pay extra money because of the higher tax.”

The trade war alone isn’t responsible for such misclassifications.

Months before it started, the United States slapped a 183 percent anti-dumping duty on all Chinese hardwood plywood imports. An anti-dumping duty is imposed on imported products sold below fair-market value.

Shortly afterward, some Chinese exporters tried to avoid the higher rate by shipping hardwood plywood under the code for softwood plywood, according to Timothy Brightbill, the lead counsel for the Coalition for Fair Trade in Hardwood Plywood.

The two types of plywood share the same first four digits of the HTS code — 4412 — but softwood plywood’s tariffs ranged from 0 to 8 percent at that time.

American involvement

In 2012, a Chinese medical rubber manufacturer sought advice on an online import-export message board. He wrote that his American client had asked him to switch the code of his product from vulcanized rubber to surgical appliances in an attempt to lower duties.

“Follow your client,” many of them advised.

Even if misclassifications originated with the exporter, it’s the importer who incurs the penalty if caught, said John Heimsath, CEO of an import logistics and consulting firm in Texas.

“The importer of record is the one who's liable for any misstatements on an entry, because it’s an importer’s responsibility to classify their cargo correctly,” Heimsath said, adding that importers can be either American or foreign companies.

Texas-based University Furnishings, for example, was blamed in 2015 for misclassifying wooden bedroom furniture imported from China under the code of office furniture. It cost the company $15 million to settle a lawsuit under the False Claims Act. The company, however, continued to deny any liability or wrongdoing.

The CBP collected some $40.6 billion in duties in FY2018 alone — a 23 percent increase from the previous fiscal year, mostly attributed to Trump’s new tariffs on China, according to a July CBP report.

The agency also issued fines totaling more than $92.1 million and, along with U.S. Immigration and Customs Enforcement, seized shipments valuing more than $1.3 million for tariff-related fraud and violations during the same time period, the report states.

The worst thing for an exporter, said Michael Mullen, a former CBP assistant commissioner, is to be on the CBP’s list.

Everything an “untrusted” company sends to the United States, he said, the “CBP is going to stop it and take a look at it.”

“Maybe they're saving a small amount of money on the tariffs,” Mullen said, “but they’re taking the risk that CBP is going to find out that they're doing that.”

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